Last week, five of the nation’s largest banks and 49 of its attorneys general announced a $26 billion settlement that essentially let the banks off the hook for the widespread use of fraudulent documents in the foreclosure process. Thursday, the San Francisco County assessor released an audit suggesting that many, many more demonstrable crimes were committed during the foreclosure bust of the past few years.

"About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.”[emphasis mine]

The bottom line - banks can't be trusted. Citizens can't expect that a lifetime of honest hard work and a frugal lifestyle will yield home security. Elite financiers will screw you, and the government will merely slap them on the wrist a few years later for some small percentage of law violations. Meanwhile, you're homeless.

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Whoa, there. The FBI says that over 80% of mortgage defaults were the result of fraudulent or misleading lending practices. The big players in the subprime lending biz (Ameriquest, Famco, etc.) routinely falsified documents to defraud customers and underwriters alike. Many firms employed people who specialized in altering W2 forms; such people were known as the "art department." Salesmen hid fees and points, often telling customers they were getting a low rate when the real rate was buried in the paperwork. Some went so far as to put fake documents on top of the stack of papers you sign and initial when getting a loan, with papers showing the real terms buried. After the closing, they simply tossed the top documents, so a customer who thought he was getting a 30-year fixed rate of, say, 8%, realizes only months later that he got a 15-year adjustable at 14% that can rise to 20% in just a few years. 99% of Ameriquest's loans were refinancing, so the borrowers were already in trouble and desperate. Despite the promise to lower borrowers' interest rates and monthly payments, many borrowers found both had increases, largely because of unreasonable charges for points (15-20 points, as opposed to a usual rate of 2-4) and for origination and closing fees. A mortgage broker might rake in ten or fifteen thousand dollars up front. Loans weren't often for big houses, either. The sales people preyed on minorities, the elderly, the poorly educated, recent immigrants, etc. Suppose you're a bus driver married to a waitress. One of you gets laid off. Now you can't make your payments, so you call Ameriquest. In a few months you're hopelessly behind because you have a higher interest rate and you're paying off fees to the lender.

On the other side of that were mortgage brokers falsifying documentation to underwriters, claiming higher incomes and fewer financial obligations for borrowers, even lowering the borrowers' ages (older folks are less likely to get good rates--or even to qualify for a loan). The underwriters, eager to get more mortgages to "securitize," accepted most applications at face values. One widow, living on Social Security, borrowed a couple of grand to get some of her windows repaired. She owned her house free and clear, When Ameriquest finished with her, she was homeless and deeply in debt.

Read up on this a bit. We didn't have middle class and working poor people walking in off the street and bamboozling mortgage brokers; we had mortgage brokers pursuing victims through telephone solicitation, TV ads (Ameriquest alone had a $450 million annual advertising budget), and junk mail. Those same mortgage brokers lied and cheated both borrowers and underwriters.

A couple of books to try: The Big Short; The Monster. They are full of facts.

Craig

Who are the idiots approving all these loans that people can't pay back?

The biggest killers were the lying and fraud perpetrated by mortgage salespeople. There are far more than "some" bad mortgages out there. Balloon mortgages are rarely a good deal and often a disaster. Every administration since Reagan has relaxed banking rules, and yes, the Clinton administration thought it would be a good idea to give more people the opportunity to become homeowners. Criminals took advantage of the relaxed rules. The enormous profit potential of "securitized" mortgages created a demand among lenders for more and more mortgages to feed the beast. Sub-prime lenders were raking in cash from excess points, fees, and other up-front charges while they were falsifying paperwork for both buyers and underwriters. Likewise, the money generated from fees created the need for more investment products. Hence, the mortgage bond "tranches," i.e., different levels or risk at different interest rates, which raise the default rate. New York investment banks created the "credit default swap," which is basically insurance on a tranched bond, an investment product that was designed to fail, but was given a AAA rating by Moody's and other ratings companies, who are paid--you guessed it--by the investment banks.

Mortgages and real estate finance are complicated. If the "loan officer," who has evolved into a cutthroat mortgage salesman, lies to you, fails to provide you with a good faith estimate as required by law, falsifies documents, over values the property you're buying by bribing appraisers--which can be as easy as threatening to cut off their business--fabricates a credit history for you to fool underwriters and alters your W-2 so you seem to have a higher income, how are you to know you're being bamboozled? You never see the falsified documents. Most people don't know what a good faith estimate is, let alone that the mortgage salesman is required to give you one so you don't get surprised at closing. Must we be finance experts to get a fair deal? Remember, too, that back in the 90s and the early 2000s, our credit ratings were not readily available, nor were interest rates, which were apparently delivered from on high. Must we be automotive engineers and finance experts to get a fair deal on a car? Must we be computer whizzes to come home with the cable we need, or do we trust the kid working the floor?

Blaming people who have lost their homes because of unscrupulous, dishonest mortgage salespeople is simply blaming the victim. Sure, "the people" made some mistakes, but the average joe is a lot more likely to make that mistake when the guys in the expensive suits are lying to him about what a good deal he's getting.

The recent $26 billion settlement doesn't let the banks off the hook. They are still liable for all the fraud committed in their holy names. And there was a lot of fraud . . . .